Face valueCalling Canberra

AN OLD-FASHIONED red telephone box stands in the reception of Telstra's chic Sydney offices. Draped inside is a Superman costume. It is an outfit Sol Trujillo must be sorely tempted to try on right now. Since taking over as chief executive of Australia's biggest telephone operator 11 months ago, Mr Trujillo, a Mexican-American, has been trying to drag the country's telecoms industry into the 21st century. It is a challenge that might daunt even a native of the planet Krypton. Take those public phone boxes: Telstra has 31,000 of them dotted around Australia. Most are unused since 90% of the population has a mobile phone. Telstra loses A$30m ($23.2m) a year maintaining them. Yet there are howls of protest each time one is removed.

Mr Trujillo's task is to turn a former state monopoly into a modern, competitive company. But while opening Telstra's markets to competition, the government has also boxed it in with regulation. John Howard's administration expects Telstra to keep delivering a nationwide service to a population a fifteenth the size of America's, spread over almost as big a landmass. But as its main shareholder, as well as its regulator, the government also needs Telstra to keep making juicy profits—at least if it is to sell its remaining 51.8% stake for some A$25 billion this autumn, as planned. The float, which ministers said this week is still on track, would be the third-biggest share sale of all time.

Mr Trujillo is refusing to endorse these contradictory objectives. Within weeks of arriving, he told Australians that their phone company was in far worse shape than they thought—its most profitable business, fixed-line, increasingly undercut by mobile and internet telephony. “I came here saying I would tell the truth about the condition of this company,” he says. A telecoms lifer—at 32 he was the youngest executive officer in AT&T's history—Mr Trujillo, now 54, has lots of experience modernising phone companies. As the head of US West in America and Orange in Europe, he promoted new technology and products, before selling out to bigger rivals. But both the American and European markets had had 20 years or more to get used to the idea of privatisation. Australia, with just ten years' experience behind it “is still learning that governments don't have to do everything,” says Mr Trujillo.

His response has been to move fast—announcing plans to cut almost a quarter of Telstra's 52,000 workforce, attacking bureaucracy and approving A$25 billion of investment over five years. He has been straight, too, about the pain—lower profits and dividends for the next two years. After that he promises growth.

But it is in his dogged battle to persuade the Australians to deregulate their markets that the small, softly spoken outsider has had to be toughest. His biggest gripe concerns a proposed $3 billion broadband fibre network to speed up Australia's painfully slow internet connections. Australia's main regulator proposes to let rival operators, such as SingTel Optus, use Telstra's new network at a low set price. Mr Trujillo is having none of it: “Those who risk capital to earn returns shouldn't have to subsidise those that don't.” Worried that giving rivals a free ride would undermine his profits, Mr Trujillo is threatening not to lay the fibre: “My duty is to our shareholders—including 1.6m ordinary Australians. I will only invest where I can earn an economic return.”

He argues that Australia risks emulating the “parasitic competition” that prevailed in America in the mid-1990s when the Baby Bells (such as US West) were forced to open their local networks to newer carriers. The result, he argues, was that nobody invested and America lost its global lead in broadband deployment. America, however, saw its mistake, recognised the need for scale in the telecoms industry and is now allowing mergers that amount to a recreation of the old AT&T.

Mr Trujillo reckons Australia is at least five years behind. A mish-mash of rule-setting bodies has led to lots of regulation and uncertainty. Recent comments by Helen Coonan, the communications minister, suggested future regulation of Telstra's yet-to-be-built third-generation mobile network—something no other country seeks to control. No wonder Phil Burgess, a long-time colleague of Mr Trujillo's, said he would not recommend Telstra shares to his 88-year-old mother.

Mr Trujillo's habit of hiring old colleagues from outside Australia has antagonised some. He has also recently been accused in the Australian Financial Review of handing out lucrative contracts to favoured suppliers, without tendering in the proper manner. But many of the attacks on Telstra's boss have been distinctly unsavoury: cartoonists have shown him astride a donkey wearing a sombrero, although his family migrated to the United States two centuries ago. Certainly his warnings and regulatory battles have pushed Telstra stock down by a quarter since his arrival, while the Australian market has risen 25%.

Yet Mr Trujillo is right to stand firm. And his opponents are wrong to characterise Telstra as a coddled monopoly. Recent analysis from Deutsche Bank shows that while the company's returns are indeed good (although already declining), they are best in unregulated or only lightly regulated businesses: telephone directories, mobile services and newer products, such as broadband access. The old copper wire, fixed-line network is in sharp decline and will earn just an 8% return by 2007, estimates Deutsche—below Telstra's cost of capital.

Beyond that, Australia needs a fast, modern telecoms infrastructure. And the quickest way to get there is to allow unfettered competition. Mr Trujillo says that America and Europe learned long ago that “to foster competition the government cannot control the levers, it must let the market work. Virtually every other country has moved towards less regulation in telecoms.” If he succeeds in getting Australia to move in the same direction, that Superman costume will suit him nicely.

This article appeared in the Business section of the print edition under the headline "Calling Canberra"